The New Land of Opportunity IT'S A GLOBAL ECONOMY--SO QUIT WHINING ABOUT OUTSOURCING. INDIA'S BOOMING MIDDLE CLASS HAS $420 BILLION TO SPEND. HERE'S HOW TO GRAB YOUR SHARE.
By Om Malik

(Business 2.0) – On a typical afternoon, 26-year-old Shruti Sharma heads with friends to Gurgaon, a New Delhi suburb that's also a shopper's paradise. The malls here are vertical versions of their U.S. counterparts: five-story high-tech bazaars with multiplex cinemas, ice cream parlors, escalators, parking lots, even Muzak (smarmy versions of Bollywood disco hits). Outside it's so hot the asphalt is melting--talk about Indian summer--but inside, shoppers stroll in air-conditioned bliss past a Pizza Hut, a Subway, a Benetton, and a TGI Friday's. Sharma volunteers that her favorite brands are, in no particular order, Nike, Nokia, McDonald's, and Levi's. "Buying habits are changing," she says with a shy smile. "Nothing less than a brand name like Nike or Adidas will do."

I'm not sure what's more amazing: Gurgaon or Sharma. When I was growing up not far from here, Gurgaon was little more than a tiny town built on a fly-blown cow pasture where my friends and I would go to buy cheap Kingfisher beer. In the past three years, it's sprouted six malls--with five more under construction--and a skyline of shiny new office buildings and call centers. Filling these new structures are people like Sharma, who answers phones in a South Delhi industrial park for a U.S. Internet service provider. She earns more than $9,000 a year, 19 times the average Indian wage.

To some in America, which I now call home, that makes her a job stealer. But in India, people like her are becoming so common that local newspapers have begun referring to them as "zippies"--young Indians who walk with a zip in their stride, oozing with attitude, ambition, and money. Zippies represent India's burgeoning middle class, which, by the way, outnumbers the entire U.S. population.

Instead of a threat, the zippies signify an unprecedented opportunity for American business. India is undergoing an economic boom the likes of which the world sees perhaps twice a century. In places like Gurgaon's Mall Mile, you can feel the explosion of commerce. Malls have sprung up in Bangalore, Calcutta, Mumbai, and scores of smaller cities. Thanks to low interest rates, deregulation, and an influx of 785,000 new jobs at call centers and programming houses, Indian consumers are buying up everything from imported computers and software to cell phones and clothes. According to some estimates, 487 million middle-class Indians will spend an additional $420 billion during the next four years.

There are other tantalizing hints that India will become even more attractive as an emerging market for U.S. businesses. The new prime minister, Manmohan Singh, is an Oxford-educated former finance minister whose 1990s fiscal reforms are credited with setting India on its remarkable trajectory. Indeed, India's economy is projected to grow 7.2 percent this year. Next January the World Trade Organization will eliminate trade restriction on industries such as textiles and pharmaceuticals, which should boost exports in these sectors and put even more disposable income in Indians' pockets. In turn, that will open the door wider to more imports from the United States.

Of course, nothing in business, especially global business, is without risk. A big wild card is India's notoriously unstable government. The communists and socialists who helped forge Prime Minister Singh's new ruling alliance could easily derail progress. They promote a populist agenda that includes using the country's precious resources to subsidize power and fuel for farmers and the poor. Investment banker friends of mine joke about India's "democracy discount," imposed by foreign investors afraid to do business in a country that has elected 10 new governments in the last 20 years.

Nevertheless, Rakesh Jhunjhunwala, a 44-year-old investor who's been called India's Warren Buffett, sees the nation's economic engine only getting stronger. Once an accountant who made just $100 a month, he's now India's largest private investor, with an estimated net worth of $250 million. Like the Sage of Omaha, he takes the long view and bets on fundamentals.

At the wood-paneled bar of Mumbai's white-shoe Cricket Club of India, Jhunjhunwala imparts the key to understanding India's future. "This is much like America in the 1950s," he says, his back to a veranda that looks out on the lush outfield, a reminder of India's colonial past. "It's a bottom-up kind of growth driven not by temporary circumstances." While he believes outsourcing is helping, he cites a more important demographic shift, in which spenders are replacing savers. By 2006, India's 20- to 34-year-old population will swell to 280 million. These zippies-to-be will marry, start families, and buy homes, appliances, automobiles, and consumer products. For India, Jhunjhunwala forecasts "long-term consumerism."

How Do You Capitalize?

But clearly the opportunity is already here. And plenty of big-name companies, from America and elsewhere, have started moving in. U.S. exports to India surged to $5 billion in 2003 from $4 billion a year earlier. Fiber-optic equipment maker Corning, ailing in the United States, has sold an estimated $50 million worth of cable to Indian telecom operators. Likewise, South Korean carmaker Hyundai has captured nearly 20 percent of India's auto market. Indians have bought $2 billion worth of cell phones and networking gear from Nokia alone. It doesn't hurt that Indians are exposed to global marketing messages through CNBC, HBO, and MTV. "The Indian middle class is easier to target because people understand English and have a Western orientation," says Rory Cowan, president of Lionbridge Technologies, which sells database translation software throughout Asia. "In China it's a longer slog."

Still, it's one thing to salivate over half a billion Indian mall rats, and another to start selling to them. Foreign companies that have made the attempt complain of ridiculously low margins, slow implementation of business-friendly laws, and bewildering cultural diversity: The residents of India's 28 states and seven union territories speak 17 major languages and practice seven religions. Such frustrations led scores of multinationals to pull out of India in the 1990s, according to Ingrid Belton, director of trade policy at the U.S. Chamber of Commerce's U.S.-India Business Council. "Those companies were the pioneers," she says, "and the pioneers tend to take the arrows."

Belton says India isn't yet an easy place to do business, "but it's better." And now that there's so much money to be made there, executives I interview in America routinely prod me for the key to cracking the Indian market. Having grown up in India and followed its rise for the past two decades, I usually tell them they need to think locally, offer value, and be patient. That last one is key: You can make an elephant dance. But it takes time to learn the right tune.

Ambani's Law

Perhaps no one understood the dynamics of Indian marketing better than the late Dhirubhai Ambani, a self-made billionaire who started out as a gas station attendant in the 1950s. Expanding first to textile production, then to oil refineries, Ambani and his family built a business empire that today accounts for more than 3 percent of India's gross domestic product. Ten years ago, when India began deregulating communications, U.S. telecom executives approached Ambani to form a mobile-phone company.

Ambani refused, saying (according to Indian business folklore), "When it's possible to offer calls that cost about the same as a postcard, then we can think about setting up a mobile-phone business." At the time, postcards in India cost a penny, and per-minute phone charges averaged about 50 cents, among the highest in the world.

I like to call his philosophy Ambani's Law of Indian Marketing. If Ambani had coined such a law, it would have stated that you don't make money in India until your product or service makes sense for the masses, the hundreds of millions of people who earn as little as $3 a day. In 2002, Ambani's son Mukesh finally launched a phone company, Mumbai-based Reliance Infocomm. Reliance charges less than 2 cents a minute. (Postcards, meanwhile, are getting more expensive: They now cost 1.5 cents.) Reliance has already captured 22 percent of the Indian mobile-phone market--7.5 million users--and is profitable despite an average customer phone bill of about $11 per month.

Value Sells

You're missing the point if you believe that Ambani's Law simply equates cheapness with mass markets; if that were true, Chinese companies would be cleaning up in India. They aren't. Rather, the secret is a blend of price, utility, and cachet.

Cell phones are the perfect example; in fact, nothing symbolizes India's newfound consumerism better. As I walk through my old stomping grounds in a decidedly dowdy district of New Delhi, I notice that the paan walaas--street vendors who sell cigarettes, chewing gum, and betel nuts--now also hawk prepaid phone cards. Enrique Iglesias's latest album is being promoted here, not on MTV but through downloadable ringtones hosted by wireless service providers. Twenty years ago, when my parents got their first landline, friends came over to celebrate as if the whole neighborhood had won the lottery. Now I can't pray in temple without hearing beeps between chants.

Yet with cell phones, brand names matter. Otherwise, everyone in India would carry a $50 model from Chinese manufacturer Ningbo Bird or inexpensive offerings from the likes of Philips and Alcatel. But they've all lost out to higher-priced handsets from Nokia and Samsung. In fact, Samsung, the fastest-growing cell-phone maker, is on track to garner nearly 29 percent of India's handset sales, roughly 5 million units by the end of 2004. It positions its color-screen camera phones as lifestyle items. (In April, Samsung sponsored a cell-phone fashion show, with stylish models walking down runways making mock calls.) "Price is not the only criterion in the Indian market," agrees Kunal Ahooja, vice president for Samsung's telecom business in India. The proof: Samsung charges $80 to $550 per phone--up to twice as much as other brands.

India is filled with examples of foreign products that sell because they deliver value over outright cheapness. Hyundai has recently become the No. 2 car seller in India, thanks to its $7,000 Santro, which is gaining on the national favorite, the $5,700 model 800 from Maruti Suzuki. Both cars are made in India by foreign companies, but the Santro commands a higher price because air-conditioning comes standard and the car is considered more fuel efficient and better made. (Ford and General Motors are still marginal players, offering models starting at about $9,000.) South Korean consumer-products giant LG has trumped Whirlpool and China's Haier by making slightly more expensive refrigerators and air conditioners that are more resistant to the dust, extreme heat, and frequent power surges common in India's vast rural territory. Like compatriot Samsung, LG has gone from zero to roughly $1 billion in sales in India in less than 10 years. "The Koreans understand Indians' need for 'value-for-money' products," says R. Amarnath, head of research for ICICI Securities.

That said, any business wishing to truly thrive here has to do so on volume--making a small amount of profit on mass unit sales. On a per capita basis, Indians simply can't pay very much for the stuff they buy--yet.

Levi Strauss entered India in 1995 with a number of exclusive stores and premium-priced jeans, but the brand was not well-known to the Indian consumer. It cracked the zippie code by introducing lower-priced lines like Red Tabs, which go for about $25. Last year, sales grew by 20 percent over 2002. In 1996, McDonald's opened its first Indian outlet in New Delhi with a menu built around the $2 Maharaja Mac--a mutton burger designed for India's Hindu majority that doesn't eat beef. Yet sales only took off with the introduction of cheaper options like the McAloo Tikki (a potato-based patty) and McCurry Pan (chicken and vegetables baked onto a spiced bread), which go for about a dollar. The fast-food giant now has more than 50 restaurants in India.

The Lesson of the Shampoo Packet

How do you cut unit costs without sacrificing quality? Think outside the box--and in the tiny tube. While Americans buy half-gallon bottles of Pantene from Sam's Club, 70 percent of Indian shampoo is sold in 5-milliliter packets costing less than a nickel.

Likewise, Indian consumers buy 70 percent of cell-phone airtime through prepaid cards in increments as low as a few dollars. And a majority of the nearly 10 million DVD players purchased in India this year will be $45 do-it-yourself assembly kits sold at places like Old Delhi's Lajpat Rai Market, a centuries-old bazaar where rickshas and mangy dogs compete for space with salesmen spouting microcontroller specs. Buyers are really distributors: They purchase the kits for $45, assemble the players, and resell them in their own neighborhoods for a profit of about $11.

Some U.S. companies have already adopted "shampoo thinking." After introducing 300-ml bottles priced at 24 cents, Coca-Cola is finding it more profitable to shift production to 200-ml bottles sold for less than half that. Colgate toothpaste also comes in tiny packets.

Even tech companies are doing it. In 2001, Alameda, Calif., telecom equipment maker UTStarcom opened an office in New Delhi, betting that India's consumer boom would translate into greater demand for network gear. The move was prescient: India's "teledensity"--phones per million people--has jumped from 44,000 in 2000 to 77,000 today. Still, selling to Indian phone companies turned out to be more difficult than expected for Ruchir Godura, UTStarcom's India manager. He recalls the first time he walked into a potential customer's office: "The guy said, 'A dollar may be equal to 47 rupees on currency markets, but to us it's worth only 10.'" In other words, after converting UTStarcom's American prices at the going exchange rate, Godura was asked to divide by five.

Godura knew he couldn't do that and make money. One of UTStarcom's main offerings is a specialized telecom switch called a digital loop carrier (DLC), which lets phone companies deliver voice and Internet services to subscribers. The box was a hit in China, in part because it could handle as many as 480 customers. But for India's local carriers, it was overkill: Anxious to conserve cash, they only wanted to expand their networks in 100-user increments. To make matters worse, Godura found that customers preferred well-known European brands. "It seemed we couldn't sell anything in this country," he says.

UTStarcom went back to the drawing board, spending nearly a year designing a scaled-down DLC. It was just like selling good shampoo in tiny bottles: Starcom's box was small, scalable, and cheap enough for local markets. Today the company counts all major Indian phone companies as customers, and its 2004 sales in India are likely to top $50 million. Godura's advice to others tackling India: "First, figure out what your customer can charge his customers and still be profitable. If you can work within that, you can make money."

Find the Emerging Market

Look hard enough, and there exist enough profitable niches in India for virtually any American company--even one that makes software. In 1987, San Jose-based Cadence Design Systems, which sells applications used to design microchips, established a research and development branch in New Delhi to gain access to India's affordable but sophisticated programming talent. Cadence's sales in India were so meager that the company farmed them out to a local distributor.

But in 1996, Saugat Sen, Cadence's engineering director in India, predicted that the outsourcing trend would bring chip-design work to high-tech meccas like Bangalore and Hyderabad. So Cadence converted its Indian outpost into a freestanding subsidiary with sales capability. The company acted just in time: With Analog Devices, Intel, and Texas Instruments opening research facilities in India, Sen estimates that 10 percent of all chip-design software users reside here. And as young Indians abandon the old quest for "babudom"--cushy jobs in the government bureaucracy--to set up entrepreneurial ventures designing cutting-edge Bluetooth and other wireless chips, there's a long list of customers willing to pay hundreds of thousands of dollars for Cadence's high-end software. "As long as we offer value for money, people will buy it," Sen says. He estimates that within three years, as much as 15 percent of the world's chip design will happen in India, boosting demand for workstations and other development tools.

All the economic activity in my homeland makes me a little wistful. These zippies strut around with a confidence--yes, a zip--I never had growing up. When I was their age, I wanted to be a journalist, so I left India for the United States. Today, with 100 TV channels--14 of which offer news--and 39,000 newspapers, a reporter can find fame, even a little fortune, at home.

One of the last people I meet in India is my old friend J.J. Valaya, a fashion designer I once wrote about for an Indian newspaper. Seven years ago, when I last visited here, he drooled over the Armani jeans, Oliver Peoples eyeglasses, and Apple PowerBook I brought from the United States. This time, as he welcomes me into his spacious Gurgaon office (not far from Mall Mile), he shuts down his Apple eMac, puts his Sony Ericsson P800 smartphone on vibration mode, and tells me about the new Hugo Boss and Tommy Hilfiger boutiques. Freakin' Tommy Hilfiger is selling in India!

However, there are still some things my old friend can't get his hands on. As I sit down, I pull out a silvery treasure smaller than a pack of cigarettes and finger its touch-sensitive dial. Apple sells iPods in India, but not yet the iPod mini. My friend sits silently, but his eyes speak volumes.

Note to Steve Jobs, and everyone else: The elephant is putting on its tutu.

Om Malik (omalik@business2.com) is a senior writer at Business 2.0.